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1 Company Research and Analysis Report FISCO Ltd. 伪伪 Achieved record high profits from the growth in sales of brand imports and the OEM supply <8119> (hereafter, also the Company ) is a long established trading company approaching the 70th anniversary of its establishment that handles brand products with high valueadded. It develops its businesses through its 9 domestic affiliates and 20 overseas bases, which undertake a variety of functions, from manufacturing and wholesales through to retail sales. By segment, it has three business pillars; the Furniture and Houseware Business (50% of net sales), the Fashion Accessories Business (29% of net sales), and the Home Appliance Business (13% of net sales). By business model, its businesses are divided into the OEM business and the brand business. In the OEM business, it leverages its strength of possessing a global manufacturing network to provide products to clients such as Ryohin Keikaku Co., Ltd. <7453> (MUJI). For brand sales, its strength is in brand management and it is responsible for each stage, from procurement through to retail direct sales and after-sales services, and it concentrates on its large number of European brands, including Birkenstock (sandals) and Kipling (bags). In FY3/16, net sales were 49,415mn (up 11.2% y-o-y) and operating profit was 2,361mn (up 202.6%), which were its highest net sales in the last 30 fiscal periods and the second highest in its history, and it also achieved record high profits. Net sales trended strongly in the three mainstay segments, while by region, sales particularly grew in Japan. In terms of the factors behind the increased profits, in addition to the effects of the higher sales, the improvements to the gross profit margin and to the SG&A expenses ratio also contributed. The results forecast for FY3/17 are for decreases in both sales and profits, of net sales of 49,000mn (down 0.8%) and operating profit of 1,800mn (down 23.8%). But when taking a long-term perspective, these forecasts are in the context of the previous fiscal year s net sales being the highest in the last 20 years and recurring profit being the third highest ever, so the high levels of the previous fiscal year will be maintained. As its medium- to long-term direction, the Company is striving to Stably secure profit by expanding the brand business. The latest topics include the launch of the MULTI CHEF brand, which are commercial-use cooking appliances. It is utilizing its unique knowledge and expertise that it has accumulated over the many years it has been involved in the import and sales of the famous food processor brand Cuisinart to develop products that combine the latest drive technologies with traditional cutting technologies, and it will sell them for commercial use, such as to restaurants and nursing-care facilities. The Company s ROE is 13.7% (FY3/16), which as at the leading level within the 10 listed import trading companies and brand retail companies, showing the height of its management efficiency. In FY3/16, the annual dividend per share was 160 (including a special dividend of 60), while the forecast for FY3/17 is for an annual dividend of 120. 伪伪 Check Point In FY3/16, the Company achieved the second highest net sales in its history and its highest ever profits The FY3/17 results are not expected to reach the level of the previous fiscal year, but will still maintain the high level Is aiming to strengthen its revenue base by expanding the scale of the brand business. The main topic in FY3/17 is the launch of the MULTI CHEF brand of commercial-use cooking appliances 1

2 伪伪 Results trends The second highest net sales in its history and highest ever profits (1) FY3/16 full fiscal year results trends In the FY3/16 full fiscal year, net sales were 49,415mn (up 11.2% y-o-y), operating profit was 2,361mn (up 202.6%), recurring profit was 2,423mn (up 137.9%), and profit attributable to owners of parent was 1,435mn (up 147.3%), for major increases in sales and profits. This was the first time in 30 fiscal periods that net sales had exceeded 45,000mn and the second highest in the Company s history. The main reason for these results was the strong performance of each of the 3 mainstay segments, while by region, sales especially grew in Japan (increased to approximately 4,100mn). The growth in profits was also remarkable, and the Company achieved record highs for each profit item. In addition to the increase in sales, the main factors behind the record high profits were the improvement in the gross profit margin (up 2.2 percentage points) and the reduction in the SG&A expenses ratio (down 0.8 of a percentage point). Specifically, the higher sales from the overseas subsidiaries, including Sanfat Electric Manufacturing Company Limited, contributed to the increase in profits, while domestically, the increase from Birkenstock also particularly contributed. By segment, the main 3 business segment each achieved higher profits, up 914mn in the Furniture and Houseware Business, up 545mn in the Fashion Accessories Business, and up 366mn in the Home Appliance Business. By customer, OEM sales to Ryohin Keikaku grew to 17,737mn (up 17.9%), which had a positive effect on all the segments results. FY3/16 full fiscal year results (consolidated) FY3/15 FY3/16 Result % of sales Company targets Result % of sales y-o-y vs. target (adjusted) Net sales 44, % 49,000 49, % 11.2% 0.8% Cost of sales 33, % - 36, % 8.0% - Gross profit 10, % - 12, % 21.3% - SG&A expenses 9, % - 10, % 6.9% - Operating profit % 2,200 2, % 202.6% 7.3% Recurring profit 1, % 2,300 2, % 137.9% 5.4% Profit attributable to the parent company % 1,400 1, % 147.3% 2.6% Source; prepared by FISCO from Company materials 2

3 Results trends Declines in sales and profits are forecast, but results will still be at a high level (2) FY3/17 forecasts The FY3/17 results forecasts are for net sales to decline slightly to 49,000mn (down 0.8% y-o-y), with the reduction from the OEM business being covered by the brand business. Profits are also expected to decline, with operating profit of 1,800mn (down 23.8%), recurring profit of 1,800mn (down 25.7%), and net profit attributable to the owners of the parent company of 1,300mn (down 9.4%). Although the forecasts are for declines in sales and profits, on taking a long-term perspective, we see that these forecasts are in the context of the previous fiscal year s net sales being the highest in the last 20 years and recurring profit being the third highest ever, and also in the context of the impact of the strong yen. So they can be highly evaluated on the point that a high level will be maintained even in this situation. The full fiscal year results outlook assumes exchange rates of 110 to the U.S. dollar and 125 to the euro. 3

4 Results trends FY3/17 full fiscal year results forecast FY3/16 FY3/17 forecast Full fiscal Full fiscal 1H 2H year year y-o-y Net sales 49,415 22,000 27,000 49, % SG&A expenses 10, ,700 - Operating profit 2, ,300 1, % Recurring profit 2, ,300 1, % Profit attributable to owners of parent 1, , % Source: The Company s financial results briefing materials and financial results summary 伪伪 Growth strategy Further expanding the brand business and strengthening the revenue base (1) Medium- to long-term direction As its medium- to long-term direction, the Company s targets include the following: 1) to achieve net sales of 50bn, 2) to secure a stable revenue base in the brand business and to further expand the content of the OEM business, 3) to increase overseas transactions and to convert to a structure that is not susceptible to changes to the market environment and to exchange rates, 4) to diversify the procurement destinations (open-up the Southeast Asia procurement market), and 5) to achieve ROE of 15%. (2) Securing stable revenue by expanding the brand business In 2012, the Company reorganized its organization into by product category in order to strengthen expertise in the brand business, and currently it has a system of 4 business departments. Subsequently, the brand business net sales have consistently followed an upward trajectory, rising from 8.36bn (FY3/12) to 12.51bn (FY3/16). The growth of the Fashion Accessories segment has been especially noticeable, and the contribution of Birkenstock has been significant. Incidentally, the reason why Birkenstock net sales are set to fall in FY3/17 is from the withdrawal from the wholesale business as the policy of the brand head office. In terms of the addition of new brands, in FY3/12 the Company started handling the WMF brand, and then in 2013 the Kipling brand and the Silit brand. In FY3/17, it will launch the MULTI CHEF brand of commercial-use cooking appliances. The basis for the expansion into new brands is the acquisition of rights for general agencies, but Kipling was acquired as a business transfer, and going forward, the Company is on the lookout for M&As if they will enable it to acquire excellent brands. 4

5 Growth strategy Expansion of the brand business (unit: 100mn, stores) FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 forecast The brand business total net sales The Furniture and Houseware Business The Fashion Accessories Business Birkenstock* The Home Appliance Business Number of directly-managed brand stores (as of the end of May) Topics Started handling the WMF brand Started handling the Kipling brand and the Silit brand The Vitantonio My Bottle Blender was a major hit Source: the Company s financial results briefing materials, Company information *December results Brand End of business net sales exceed 10bn for the first Birkenstock wholesale operations Launch of the MULTI CHEF brand (3) The Launch of the MULTI CHEF brand of commercial-use cooking appliances The Company has a history through its Group companies of being involved from 1985 to 2013 in the import and sales of Cuisinart products, which is a famous brand of food processors. The MULTI CHEF brand of food processors and blenders that were launched this year are packed with the knowledge and expertise that the Company has accumulated up until now. These products employ a unique magnet gear (patent pending) that does not place an excessive load on the motor and gears, which can be the cause of expensive repairs, and also utilize the blade of Seki and Tsubame Sanjo technologies, which are traditional Japanese technologies that affect the cutting performance. It has already started marketing and sales of this brand to customers such as restaurants, hotels, hospitals, and nursing care facilities, and expects it to grow in the future. Source; Company materials 5

6 伪伪 Financial position and ROE A sound financial position The Company s financial position at the end of FY3/16 was sound. The balance of total assets increased 2,326mn compared to the end of the previous fiscal year to 23,047mn. This was mainly due to increases in cash and deposits of 1,434mn, notes and accounts receivable of 490mn, and merchandise and finished goods of 360mn, and the higher sales were a factor. Liabilities increased 1.327bn compared to the end of the previous fiscal year to bn, as although short-term debt declined 1.007bn, this was exceeded by the increases in accounts payable and taxes payable, and also from the recording of an allowance for fire-related losses. In the stability-related management indicators, both the current ratio (166.9%) and the equity ratio (47.5%) are favorable, and there are no concerns with regards to stability. Consolidated balance sheet, management indicators FY3/15 FY3/16 Change Current assets 15,115 17,007 1,891 (cash and deposits) 2,032 3,466 1,434 (notes and accounts receivable) 6,074 6, (merchandise and finished products) 5,656 6, Fixed assets 5,605 6, Total assets 20,721 23,047 2,326 Current liabilities 8,749 10,186 1,437 (short-term debt) 4,607 3,600-1,007 Fixed liabilities 1,917 1, Total liabilities 10,666 11,993 1,327 Net assets total 10,055 11, Total liabilities and net assets 20,721 23,047 2,326 <Stability> Current ratio (current assets current liabilities) 172.8% 166.9% - Equity ratio (shareholders equity total assets) 48.0% 47.5% - Source: the Company s financial results summary High management efficiency even among import trading companies and brand retailers In the FY3/16 results, the Company s ROE (return on equity, net profit/shareholders equity) was 13.7%. This is the leading value among the recent results of the 10 listed companies that are similar to the Company, of trading companies importing household goods, furniture, and fashion accessories, and retailers with a strength in brands, and it shows the height of its management efficiency. The Company prioritizes ROE as a management indicator and its medium-term target for it is 15%. ) 6 Source: analysis by FISCO based on each company s results information; comparison is based on the recent full fiscal year results

7 伪伪 Shareholder returns policy Dividend is forecast to increase to an annual 120 against the backdrop of the high profits The Company s policy is to stably and continuously pay dividends while retaining the internal reserves necessary to strengthen its corporate structure. The FY3/16 dividend per share was 50 in 1H and 110 (ordinary dividend of 50 + special dividend of 60) in 2H, for an annual dividend of 160. In FY3/17, the forecast is for the ordinary dividend portion to increase in the region of 10, to 60 in both 1H and 2H, for an annual dividend of 120. ( ) () [Supplementary information] 伪伪 Company profile Responsible for a wide range of operations in the supply chain, from manufacturing through to retail sales (1) Company history The Company was established in Osaka in 1946 as an exporter of accessories. Today, it handles lifestyle-related goods in general and is widely involved in operations in the supply chain, from manufacturing and importing and exporting, through to wholesale and retail sales. It has grown to be a multi-functional trading company with 9 domestic affiliates, 20 overseas bases, and 82 domestic, directly-managed retail stores. Its individuality is clear on the point of its handling of high value-added products, such as its import into Japan of differentiated European brands and its OEM procurement for customers that are very selective about the products they want, as typified by Ryohin Keikaku. 7

8 Company profile Furniture and houseware contribute significantly to sales and fashion accessories contribute significantly to profits (2) Business overview The Company s businesses are divided into the Furniture and Houseware Business, the Fashion Accessories Business, the Home Appliance Business, and the Other Business. The Furniture and Houseware Business mainly involves the procurement of OEM goods to major companies domestically and overseas. In FY3/15, it contributed 50.8% of the Company s total sales and 43.6% of the operating profit. The Fashion Accessories Business entails the import and sales of brand products to which it has sales rights, such as Birkenstock (sandals) and Kipling (bags), and also an OEM business for domestic and overseas customers. Net sales from this segment constitute 29.4% of total sales, so their scale is relatively small, but in contrast this business provides 49.5% of the operating profit and it has a high profit margin. The Home Appliance Business is both an OEM products procurement business and a brand business, with the main brands handled being Vitantonio (cooking appliances) and Mod s Hair (beauty appliances). This business contributes significantly to both sales and profits (13.3% of net sales and 29.2% of operating profit). The Other Business segment mainly handles pet-related merchandise. Business descriptions and percentages Business segment Descriptions of the main businesses Percentages Percentages of of profits operating profit Furniture and OEM for Ryohin Keikaku and WMF (kitchen goods manufacturer) 50.8% 43.6% Houseware Business Fashion Accessories Birkenstock (sandals) and Kipling (bags) and OEM for domestic and 29.4% 49.5% Business overseas retail stores, etc. Home Appliance Vitantonio (cooking appliances) and Mod s Hair (beauty appliances), and 13.3% 29.3% Business OEM for domestic and overseas manufacturers and retail stores Other Pet merchandise, pets, etc. 6.5% 1.5% *Adjusted amount % Source; Company materials Converting to a business structure not susceptible to the impact of exchange rates (3) Business environment and business model In general, trading companies involved in imports and exports cannot avoid the impact of exchange rates on their results. In several years in the past (FY3/06 to FY3/14), the Company s profits also tended to increase when the yen strengthened and decrease when it weakened. This was because the percentage of domestic sales of imported goods in the Company s business as a whole was high. Conversely, in FY3/15 and in the context of the continuing weak yen, it was able to cover for its struggling domestic business by securing an increase in profits from the growth of its overseas business. In FY3/16, even though the period of the weak yen became prolonged, its domestic business still grew and it is estimated that in addition to strengthening overseas transactions, it has furthered strengthened its business structure so it is not susceptible to the impact of exchange rate fluctuations. In the Company s business model, the OEM procurement business (74% of net sales; hereafter, the OEM business) can be clearly distinguished from the brand sales business (25% of net sales, hereafter, the brand business). In the OEM business, its strength is its manufacturing network in Asia, which it has advanced into since the 1950s (it has 20 bases in Asia, 12 of which are in China). Net sales to its biggest client, Ryohin Keikaku, were 17,737mn in FY3/16. The brand business started from it uncovering excellent brands from Europe that focused on the essential qualities of their respective products. Another of the Company s strengths is that while being a trading company, it also develops a retail (directly-managed stores and e-commerce) business and provides aftersales services that it manages itself. 8

9 Company profile The largest brand is Birkenstock (FY12/15 net sales of approximately 6.7 billion), which is managed by the subsidiary Benexy Corporation. It is a brand for sandals and comfort shoes with superior functions and beauty, has a tradition of more than 240 years in Germany, and is supported by an enthusiastic fan base despite a price range of around 10,000. The products are sold via the 58 directly-managed stores and e-commerce, and the Company has enhanced the after-sales services it manages itself for products that are often used by customers for a long time. For the future, it is considering utilizing its network of directly-managed stores to handle various other brand products with a high affinity to this brand. Kipling (bags) is a brand of nylon bags that was created in Belgium in 1987, and together with the Kipling monkey (its mascot), it is famous throughout the world as a playful, casual brand. The Company develops this business via 13 directly-managed stores (including the Omotesando and Ginza stores, as well as several outlet stores). Vitantonio (cooking appliances) is the Company s original brand, and its products are mainly manufactured at its own plants in China. Since the past, this brand has been well-known for its waffle makers, while in 2013 its one cup blender, My Bottle Blender, was a major hit. In 2015, it attracted attention for its yogurt maker and popcorn maker. A characteristic of the Company s brand business is that its involvement is not limited to marketing and retail, as it is also involved from the manufacturing stage through to after-sales service, increasing the value-added for customers. 9

10 Disclaimer FISCO Ltd. (the terms FISCO, we, mean FISCO Ltd.) has legal agreements with the Tokyo Stock Exchange, the Osaka Exchange,and Nikkei Inc. as to the usage of stock price and index information. The trademark and value of the JASDAQ INDEX are the intellectual properties of the Tokyo Stock Exchange, and therefore all rights to them belong to the Tokyo Stock Exchange. This report is based on information that we believe to be reliable, but we do not confirm or guarantee its accuracy, timeliness,or completeness, or the value of the securities issued by companies cited in this report. Regardless of purpose,investors should decide how to use this report and take full responsibility for such use. We shall not be liable for any result of its use. We provide this report solely for the purpose of information, not to induce investment or any other action. This report was prepared at the request of its subject company using information provided by the company in interviews, but the entire content of the report, including suppositions and conclusions, is the result of our analysis. The content of this report is based on information that was current at the time the report was produced, but this information and the content of this report are subject to change without prior notice. All intellectual property rights to this report, including copyrights to its text and data, are held exclusively by FISCO. Any alteration or processing of the report or duplications of the report, without the express written consent of FISCO, is strictly prohibited. Any transmission, reproduction, distribution or transfer of the report or its duplications is also strictly prohibited. The final selection of investments and determination of appropriate prices for investment transactions are decisions for the recipients of this report. FISCO Ltd.